The future of the $US

Press, 24 February 1987, Page 20

The future of the $US

The long-awaited meeting of representatives of the world’s leading non-communist economies has taken place suddenly, but with no clear outcome. The meeting has made clearer the disputes about the value of the United States dollar. At the level of Governments, the dispute has been between West Germany and Japan, on the one hand, and the United States on the other. The United States trade deficit has been running at about $l7O billion a year. West Germany and Japan both have a trade surplus, the former of $63 billion, the latter of $B6 billion.

What the United States wanted, and appears to have achieved, was an undertaking from West Germany and Japan that they would stimulate their economies a little, providing a stimulus for international economic growth. If they did not, the United States would allow the dollar to continue to drift downwards in value. Having obtained an undertaking from West Germany and Japan to stimulate their economies, the United States is beginning to- sound as if it is prepared to intervene to support the price of the dollar. West Germany and Japan would find it difficult to support the value of the dollar by themselves; with United States help, the value of the dollar could be kept up, at least for a time. Because a deal has been struck, the quarrel between Governments is not over. The United States will want to measure the extent to which West Germany and Japan will stimulate economic activity. The meeting also included representatives of Britain, France, and for some of the time, Canada. Italy was supposed to be represented, and would have liked to be there, but when it was excluded from a special meeting it refused to turn up at the full meeting and says that it will not go to a similar meeting in May.

If the value of the American dollar is stabilised, the whole of the world’s trade will be affected. Italy is a major trading economy and any international agreement will eventually have to have Italy’s co-operation. The offence taken by Italy at the exclusion from a meeting of the so-called G-5 group has not yet become an important element in the

outcome, but has the potential to do so. A second uncertainty will be most obvious during the next few days. Currency dealers will be attempting to find out the levels between which it has been agreed the American dollar should be allowed to move in relation to the currencies of other major Western trading nations. To a certain extent this will be a battle of wills. The currency dealers will want to test the resolve of the central banks to intervene by selling or buying American dollars, thereby helping to keep the dollar stable. A third dispute is largely one about basic beliefs. Many who deal in international currencies do not accept that a meeting of the G-5, or the G-7, with or without Italy, can have any permanent effect on the value of the American dollar. They point to fundamental economic questions such as the performance of the United States economy and the size of the internal deficit. Such dealers maintain that interventions by central banks can delay adjustments to the value of the dollar, but the adjustments will still be inevitable.

There is undoubtedly political content to the new measures. The United States Administration wants to head off protectionist sentiment in Congress. If it can demonstrate that Japan and West Germany are prepared to stimulate their economies, and thus their demand for imports, thereby removing from the United States some of the burden of absorbing world exports, then members of Congress may be the more prepared to drop demands for higher tariffs to protect United States manufacturers.

If members of Congress continue to see the United States building up huge trade deficits, while other countries have large trade surpluses, the idea of taking steps against those who sell to the United States will take hold. If severe tariffs and other measures to restrict trade were implemented, the Western world would face the prospect of widening economic depression. For small countries such as New Zealand, which depend on trade but have few friends, and little ability to make themselves heard, the outlook would be grim.